FACTBOX-Key mid-2010 global political risks to markets

UNREST, POPULISM AND NATIONALISM

Most experts agree the crisis has produced a modest rise in
demonstrations, strikes and other unrest, but much less than
many had predicted. Still, investors are watching closely for
any events that could affect policy-making and change the
investment environment.

Riots in Greece in May, in which three people were killed in
a burning bank, hit markets worldwide, fuelling worries that
Athens might be unable to push through austerity measures.
Unrest in other fringe Eurozone countries, particularly Greece
and Portugal, will also be watched closely, but few expect any
significant effect on policy.

In emerging markets, investors will be watching for any
signs of a shift to the left, from strikes during South Africa’s
World Cup to further expropriation of Western companies in
Venezuela. The cost of insuring against expropriation and
political unrest damage has broadly risen in the past year.

Particularly in Europe and the United States, politicians
have railed against “speculators” and pushed for tough action
against banks. This looks to be a key driver of banking share
valuations in the second half of the year.

What to watch:

— Do unions, particularly in Europe, follow the example of
Ireland, where they avoided outright confrontation for fear of
sparking a bond market crash, or take a tougher line following
unions in Greece? A European day of action on Sept. 29 will be a
key bellwether. [ID:nLDE64R13B].

— Is there a trend towards protectionism? The World Trade
Organisation says this is well under control [ID:nLDE65719K],
but other economists say protectionism is rising far faster than
governments admit, despite G20 pledges to the contrary.

US CHINA RELATIONSHIP

The emerging thorny “G2” relationship between Washington and
Beijing has become a key preoccupation for markets. While the
superpowers have worked to calm tension, there is plenty of
potential for problems.

The main bone of contention remains the yuan (CNY=: ). After
intense international pressure, China freed the currency in June
from its 23-month peg. Enthusiasm in Washington faded when it
became clear appreciation would be gradual and modest.
Particularly given high U.S. unemployment, Obama is under heavy
pressure from lawmakers and domestic industry to take a tougher
line with China and this will only increase with the mid-term
elections. At worst, the relationship could deteriorate into a
protectionist trade war.

What to watch:

— Does the U.S. Treasury formally brand Beijing a currency
manipulator in a report scheduled for Oct. 15, shortly before
the elections? It put off this decision in April, but there are
growing calls in the United States for trade sanctions. If Obama
feels compelled to take a tough line, relations could swiftly
deteriorate [ID:nN202050303].

— Disagreements over how to deal with Iran and North Korea
could be another flashpoint [ID:nTOE64J06W].

FRINGE THREATS

Regardless of its effect on the China-U.S. relationship, the
threat of conflict particularly between North and South Korea
and Israel and Iran could both unsettle global markets in the
second half of 2010.

The sinking of a South Korean warship in March with the loss
of 46 lives raised tension on the peninsula to its highest in
years, briefly hitting global markets. A measured response from
South Korea prevented a serious escalation but worries remain.
[ID::nTOE62P0A3]

Iran responded defiantly to a fourth round of U.N. sanctions
imposed on June 9 after a diplomatic campaign by the United
States and its European allies against an alleged nuclear
weapons programme.

An attempted bombing in New York’s Times Square, as well as
militant attacks in Moscow, have all underlined that the threat
to economies and markets has not gone away.

What to watch:

— Any further escalation on the Korean peninsula could
panic markets, but investors are concerned that an implosion of
the North Korean government could leave South Korea with the
crushing costs of reunification.

Any clues to the health of potentially ailing North Korean
leader Kim Jong-il will be closely watched, as will a rare
meeting of the North Korean Workers Party in September.

That is expected to see the elevation of Kim’s younger son
Kim Jong-un to a key post in preparation for the succession, but
he is seen lacking his father’s clout and other factions may
also have an eye on power [ID:nTO65606W].

— Does Obama sign more U.S. sanctions against Iran into
law? Does Israel signal it is moving towards launching an attack
on Iranian facilities? That could set back Tehran’s nuclear
programme but risks provoking a wider conflagration that could
affect oil supplies. [ID:nLDE62N1D0]

FACTBOX-Key mid-2010 global political risks to markets